Direct-to-consumer advertising in pharmaceutical markets: Effects on demand and prices

Dhaval Dave03 June 2010

As a result of changes in regulation in the late 1990s, spending on direct-to-consumer advertising of pharmaceutical drugs in the US leapt from $150 million in 1993 to $4.24 billion in 2005. This column examines the effect on demand, finding that broadcast advertising was responsible for 18% of the overall increase in prescription drug expenditures in the US during the period.

Direct-to-consumer advertising (DTCA) by pharmaceutical companies has always been somewhat controversial, with the US and New Zealand being the only two developed countries that allow such promotion. Direct-to-consumer advertisements in the US are broadcast on television and radio, are displayed on billboards, appear in the pages of magazines and newspapers, and are on the internet. The average American television viewer, for instance, can expect to spend as much as 16 hours per year watching such ads (Frosch et al. 2007).

Expansion of DTCA into broadcast media is a relatively recent phenomenon in the US For a number of years, the Food and Drug Administration (FDA) had guidelines requiring the advertiser to provide detailed information on usage and risks that is contained in the drug’s FDA-approved product label insert, thereby confining ads to print form. Expansion into broadcast DTCA was precipitated by the FDA’s regulatory changes in 1997 and in 1999. The new regulations require broadcast ads to include only “major statements” of the risks and benefits of the drug along with directions to alternate information sources for full disclosure. This clarification of what constitutes adequate disclosure removed a major barrier that had initially made TV and radio advertisements infeasible. DTCA spending subsequently increased from $150 million in 1993 to $4.24 billion in 2005. Specifically there was no broadcast advertising in 1993, but it now comprises the primary form of DTCA – amounting to $2.55 billion in 2005.

The new regulations remain a controversial policy and are facing increased scrutiny from Congress and consumer groups. The pharmaceutical industry claims that such advertising educates patients on potential treatment options, opens up lines of communication between the patient and the physician, and can even increase patient-physician contact or expand appropriate treatment for under-treated conditions. Congressional leaders have contended that DTCA raises prescription drug costs and requested that the policy be revisited. A popular proposal among critics of DTCA in Congress is to impose a moratorium on advertisements during the first two years of a drug’s launch, thereby giving the FDA, doctors, and patients time to learn about any new safety issues after the drug is approved and enters the market. Some consumer groups maintain that consumers may be harmed by misleading advertising and that the recent expansions in DTCA are responsible for the increases in expenditures on prescription drugs.

Based on evidence from prior studies, there is perhaps some truth in all of these positions. Rosenthal et al. (2003) have studied brands in five therapeutic classes between 1996 and 1999, the period when DTCA was just starting to pick up, and find that such advertising was primarily effective in raising sales for the entire therapeutic class. Another study in a randomised control trial setting, with professional actors posing as standardised patients, finds that brand-specific DTCA (Paxil in this case) is effective in raising its own demand by leading to a prescription for that brand, as well as in raising overall demand for anti-depressants (Kravitz et al. 2005). There is also some evidence that DTCA may expand physician-patient contact. Iizuka and Jin (2005) find that a $28 increase in DTCA leads to one additional physician visit within 12 months which then results in a prescription. Some studies have pointed to the benefits of DTCA in terms of raising adherence to prescription drug therapy among patients and improving health outcomes (Calfee et al. 2002, Bradford et al. 2006). Pointing to perhaps an increase in misuse, another study finds that higher levels of drug promotion and advertising lead to increased reporting of adverse medical events for certain conditions (David et al. 2009).

How does direct-to-consumer drug advertising affect prices?

In recent research Henry Saffer and I address the cost side of the debate (Dave and Saffer 2010). There has been a gap in the literature with respect to how DTCA impacts pharmaceutical prices, making it difficult to evaluate the extent to which DTCA has influenced the increase in prescription drug spending.

We analyse monthly sales and prices for all prescription drugs, advertised and non-advertised, in four major therapeutic classes:

analgesics/musculoskeletal (anti-arthritic);

anti-lipidemics (cholesterol-lowering);

gastrointestinal acid reducers; and

insomnia aids.

The data span 1994 through 2005, the period which enveloped the shifts in FDA guidelines and the large expansion in DTCA. These drugs had combined sales of $48.9 billion in 2005, representing about 24% of total prescription drug spending in the US, and DTCA of $1.04 billion in 2005, representing approximately 25% of total DTCA undertaken for all prescription drugs. The drugs in these classes treat a wide variety of highly prevalent ailments and are indicated for large segments of the population. These therapeutic classes also include drugs with relatively low and high levels of DTCA. There is generally large variation in the prevalence of DTCA across drug classes. For instance, in the study sample, 69% of cholesterol-lowering drugs were advertised directly to consumers between 1994 and 2005. In comparison, about 50% of insomnia drugs, 30% of gastrointestinal drugs, and only about 23% of anti-arthritic drugs were advertised directly to consumers.

Promotion may affect price through two different processes. First, promotion may increase demand and/or reduce the absolute magnitude of the demand-price elasticity (that is, reduce the price-responsiveness of purchasers), which may raise price. Second, the increase in operating costs due to higher promotional spending may be shifted to purchasers in the form of higher prices. Empirically isolating the effects of DTCA on demand and prices requires an exogenous change in DTCA. Our analysis exploits such a change that was set in motion through the FDA’s shift in guidelines which made broadcast DTCA feasible in the late 1990s. The specifications also account for the drug’s life cycle, competitors’ advertising and general competitiveness of the drug class, other unobservable confounding trends, and unobservable heterogeneity across different drugs.

We find robust evidence that broadcast DTCA raises the demand (sales) for the advertised drug as well as its price. The elasticity magnitudes suggest that a 100% increase in broadcast DTCA will raise demand by about 10% and price by about 5%, all other things remaining unchanged. Relative to broadcast DTCA, advertising in print media has a smaller impact on sales and price; elasticity magnitudes are about half those of broadcast DTCA.

Our study also finds some evidence that class-level DTCA may have raised sales for the non-advertised drugs, which tend to cost less than advertised drugs. Promotion directed at physicians through company representatives to physician offices (known as detailing) and sampling are found to have the largest impact on demand (with elasticity estimates ranging from 0.35 to 0.50 compared to 0.10 for broadcast DTCA), which may attest to why physician promotion still makes up about 85% of all pharmaceutical promotion.

A call for cost and benefit analysis

DTCA has emerged as a marketing force in the US healthcare system and is only expected to grow along with expenditures on prescription drugs. While the debate surrounding DTCA is unlikely to be resolved anytime soon, DTCA should be evaluated both in terms of its costs as well as its benefits.

The benefits derive from improved health due to increases in the number of individuals using prescription drugs and increased adherence with drug therapy. Detecting and treating health conditions at an earlier stage, through primary care, may also be more cost-effective relative to treatment at a later stage through acute care.

In addition to potential misuse, the costs of DTCA result from increased drug prices and increased use of more expensive drugs in place of equally effective lower-priced drugs. Higher drug and health care expenditures in general tend to raise insurance premiums and may lead to a larger prevalence of uninsured. Based on our estimates, the increase in broadcast DTCA appears to have been responsible, on the net, for about 18% of the overall increase in prescription drug expenditures between 1994 and 2005 in the US, with about 12% due to greater sales and 6% attributed to higher prices.